Evolution Of Bitcoin

There’s now $45 million of Bitcoin activity per day, and it’s made some people rich. Wealth circulated around the conference in the form of casual Bitcoin bets, 100-dollar bills being fed into Bitcoin ATMs, and at least one couture-wrapped girlfriend.

"If I were you, I’d buy as many Bitcoins as possible before the end of the conference," Cedric Dahl, one of the founders of the Bitcoin exchange Buttercoin, told me, hinting that the price would skyrocket again because of all the attention on the conference; CNN, Russia Today, Vice, and Thomson Reuters were among the media in attendance.

That hasn’t happened. As of Tuesday morning, the price of a Bitcoin was steady around $120. That’s still astonishingly high for a currency that relies on a stack of arcane code and a network of anonymous helpers in lieu of a central government.

Actually, it’s astonishing that Bitcoin is still around at all. The currency has had several near-death experiences in its short life and received a number of premature obituaries. It has survived massive cyberattacks, scams, technical panics, and extreme price fluctuations. In July 2010, a bug was discovered that allowed anyone to spend anyone else’s Bitcoins. It was fixed. In the summer of 2011, when the mainstream media first discovered Bitcoin, the currency spiked to $31.91; four months later, it crashed below $2. Then it started climbing again.

The mix of competence amid chaos reminded me of another humanist experiment: the early Occupy Wall Street occupation, which had an overlapping constituency. Like Bitcoin, Occupy Wall Street attracted many fringe elements, but its core organizers were clear-headed revolutionaries. For every complication that arose in the Wall Street tent city, a committee would form and handle it. When Mayor Michael Bloomberg announced the park had to be closed in order to be cleaned, the occupiers bought brooms and scrubs and cleaned the park themselves. They had the persistence of ants.

But one night, the New York City Police Department swept in just after 1:00AM and destroyed the camp. That was the end of the occupation. The movement survives in bits and pieces and in the history books, but it never quite recovered.

After all the strife, I expected something similar to happen in the Bitcoin community. One day, there would be a catastrophe too devastating to recover from; some people would pick up the pieces but most would lose interest. Instead, Bitcoin has rebounded from every setback stronger than before.

How is it that Bitcoin has managed to avoid annihilation by governments, hackers, and overhype? How has it evaded the "slow internal death," as the economist Garrick Hileman put it, that destroyed the English barter system LETS? How does it continue to seduce new users, while keeping the base enthralled? Why won’t Bitcoin die?

I decided to walk around the conference and ask.

IT’S ASTONISHING THAT BITCOIN IS STILL AROUND AT ALL

Math

Mike Caldwell created paper Bitcoin money to complement his Casascius coins.

"Because it’s math. You can’t kill math," explained one of the Bitcoiners manning the Shirtoshi booth, which sold T-shirts with slogans like, "Bitcoin Billionaire," "RUN BTC," and "Bitcoin is the future."

Math, or the underlying ingenuity of the Bitcoin protocol, is a big part of the reason for its resilience. Bitcoin is basically a ledger system in which every transaction in the economy must be logged in a central public record called the blockchain. New transactions are checked against the blockchain to ensure that a specific user hasn’t tried to spend that Bitcoin before, eliminating the "double-spend" problem. The system depends on users to provide the computing power to do this logging and checking. These users are called miners because they’re rewarded for their work with new Bitcoins; this also means the money supply will gradually increase until it hits a cap of 21 million. Once that happens, miners will be compensated with transaction fees just like those charged by PayPal or Visa.

Satoshi Nakamoto, the pseudonymous programmer (or programmers) who invented Bitcoin and organized the original community must have agonized over its economic and technical features. Bitcoin is deflationary, which is extremely rare for a currency — the only analogues would be gold and silver. Bitcoins can be divided down to eight decimal places, so a single Bitcoin may eventually be like a $1,000 bill, with most transactions done in smaller denominations. A one hundred millionth of a Bitcoin, the smallest unit, is called a "satoshi."

IF BITCOIN WERE A PERSON, IT WOULD BE "REALLY SOLID, REALLY POWERFUL. JUST LIKE, A NATURAL-BORN LEADER."

Bitcoin was born on January 3rd, 2009, at 6:15PM Greenwich Mean Time, which is when Satoshi Nakamoto mined the first 50 coins, known as the "genesis block." One attendee at Bitcoin 2013 offered to read the currency’s astrological chart for me. Bitcoin’s sun sign is Capricorn, which means it is an innovator. Its Mars sign is also in Capricorn, which means people love it. The sun and Mars were close together in the sky on the night of Bitcoin’s birth, which gives it energy and strength. If Bitcoin were a person, she said, it would be "really solid, really powerful. Just like, a natural-born leader."

Bitcoin’s design had flaws, but the original code was good enough to entice programmers like Jeff Garzik, a coder at Red Hat, and Gavin Andresen, a software developer at University of Massachusetts, to work on it for free. The fundamentals were strong: transparency created trust; a network of users substituted for a central authority; and built-in deflation canceled out any circumstantial inflation that might devalue the currency. Whenever a problem arose, members of the community worked together to fix it. Everyone who has tried to find a fatal flaw in Bitcoin, including renowned security researcher Dan Kaminsky, has failed.

Garrick Hileman, who is working on his PhD and teaching at the London School of Economics, gave a talk at the conference about the history of alternative currencies and why they fail. He thought Bitcoin was done for after the big crash last year, but now he’s bullish (though he hasn’t bought any, in order to preserve his academic neutrality).

"There is something really special about the fundamental protocol, and also the people who are working on it, and the ethos of the Bitcoin community," he said. He pointed to the most recent crisis, in which an upgrade to the Bitcoin software was not universally adopted, creating a "chain fork" with two conflicting versions of the blockchain. This was potentially disastrous, because it negated the safeguard against spending the same Bitcoin twice. Leaders at theBitcoin Foundation, the closest thing Bitcoin has to a government, corralled miners into using the "correct" chain.

"It reminds me of the headline of this hotel review for The Bowery, where I’m staying in New York next week: ‘Tried to hate it, couldn’t hate it,’" Hileman said. "You can’t keep Bitcoin down."

Growth

Cameron Winklevoss, left, and Tyler Winklevoss, right, during their keynote.

The Winklevoss twins structured their presentation around a quote attributed to Gandhi: "First they ignore you. Then they laugh at you. Then they fight you. Then you win."

Bitcoin can no longer be ignored. At first, the allure was mythical: Anonymous genius invents a currency built to mimic cash on the internet, then disappears without a trace. "It’s such a good story. It's such a fun world," comedy writer Nick Douglas told me in June of 2011. "I love imagining the stories something like Bitcoin conjures up; a market of Libertarians and criminals."

Since then, the Bitcoin economy has grown in every sector. The black market Silk Road, which exclusively accepts Bitcoin, is about 36 times larger than it was; the number of people opening new Bitcoin accounts has increased by about the same amount. More merchants are accepting Bitcoin for goods and services, with payment services like BitPay and BitInstant reporting multi-million dollar monthly volumes. The prestigious Y Combinator business incubator just accepted Buttercoin as its second Bitcoin startup, and more Silicon Valley investors are getting into the game. Speculators have jumped on Bitcoin as well, pushing the price up over $237, until it crashed to about $120. One Manhattan bar that started taking Bitcoin five weeks ago has already done more than $20,000 worth of sales in the e-currency.

The establishment has noticed. Every mainstream media outlet picked up the story when the price shot up in April; CNBC even added a Bitcoin price ticker. The Treasury Department announced that Bitcoin businesses are required to register with the government. Even PayPal, one of the institutions that Bitcoiners seek to displace,floated the idea of adding support for the e-currency.

But on Mahatma Gandhi’s (probably apocryphal) four-step path to change, Bitcoin is still stuck somewhere between being laughed at and being fought. Nobel-prize winning economist Paul Krugman recently called it "entertaining." Meanwhile, the Mt. Gox Bitcoin exchange, which until recently controlled 76 percent of global trading, had two of its bank accounts seized by the Department of Homeland Security (DHS).

Despite Mt. Gox’s troubles with the DHS, there was no sense of persecution at Bitcoin 2013. There wasn’t even much discussion of Mt. Gox, which did not send any representatives due to its issues with the DHS and a $75 million lawsuitwith one of its partners, Coinlab.

Given Mt. Gox’s outsize role in the Bitcoin economy, I was surprised that no one at the conference was talking about the absent Goliath. An 18-person company based in Tokyo, Mt. Gox is likely the most profitable Bitcoin enterprise in existence, processing around $6 million in Bitcoin trades per day. However, Mt. Gox has struggled due to its own explosive growth, and is now regarded as a slow, monopolistic drag on the Bitcoin economy.

When asked, attendees seemed to feel that if Mt. Gox shut down, it would be a good thing. In fact, Mt. Gox’s replacement may already be on the way. I met entrepreneurs who were starting new Bitcoin exchanges like Buttercoin, Kraken, and the revived Tradehill.

BITCOIN IS STUCK SOMEWHERE BETWEEN BEING LAUGHED AT AND BEING FOUGHT

Fantasy

Bitcoin tends to grab people and hold onto them, inducting them into an alternate world ruled by computer geeks and idealists. It’s common for people to say that after learning about Bitcoin, they were unable to sleep because they couldn’t stop thinking about it.

"If you ever read sci-fi, it’s like creds," said Jeff Garzik, an early Bitcoin developer who is moving his family from Raleigh to Atlanta to take a job at BitPay.

Neutral galactic currency is a common trope in fiction, and Bitcoin is its first manifestation outside of a videogame. Garzik gestured in the direction of some of the hardware startups peddling wallet-size USB cards designed to hold Bitcoin. "It’s like giving someone your cred stick," he said, giggling.

It was easy to see how acting out a sci-fi fantasy would appeal to this crowd. I saw Bitcoiners sucking on e-cigarettes and sporting necklaces made of Casascius coins, real coins made of brass and gold that contain the private keys for digital Bitcoins while throwing around the lingo of the new economy: "mining," "hashing," "block reward."

But sci-fi is just one of many realities imaginable with Bitcoin. I wandered through tables of Bitcoiners eating breakfast on Sunday, catching bits of conversation: "We can’t keep bailing out the banks," "My interest turned to Bitcoin for dispute negotiation." The Seasteading Institute, the organization that wants to set up utopian communities on ocean liners in international waters, had a booth on the show floor. After one speaker was asked a question about about paying taxes in Bitcoin, a heckler called out, "Use Bitcoin to avoid taxes!"

It’s hard to believe Bitcoin can be everything to so many different groups of people. At lunch, I sat between 9/11 super-truther Sander Hicks and an Argentine developer who has to live with his government’s harsh capital controls. During the conference, the entrepreneur Dmitry Murashchik built a website, "Why isn’t Bitcoin worthless?" which serves up answers from, "You can use it for triple-entry accounting, which has the potential to change finance as much as the invention of double-entry accounting" to simply "Cyprus."

Despite all the grandiose talk, most of Bitcoin’s revolutionary potential is still unlocked. At the moment, Bitcoin is only essential in a few situations: buying contraband on Silk Road, and making scads of money by speculating on a volatile new currency.

Philosophy

Supposedly there were a lot of bankers at Bitcoin 2013, but I only met one, a 24-year-old New Yorker who works for one of the biggest investment banks in the world. "I’m a trader. I make shit go up and down," he said, by way of introduction. He asked that I not use his name or the name of his bank because of his employer’s high profile.

We were standing in a small group of Bitcoiners on the patio of the Hilton’s hotel bar where the exchange Tradehill was hosting an afterparty with free drinks and tiny Bitcoin-frosted cupcakes.

"The only thing I’ve ever seen trade like this or move like this is an infection," said the trader, who studied biology. "Put one bacteria in a tray of food and it doubles and it doubles and it doubles, and eventually it eats up all the food. Then imagine food coming into the system. The only thing I’ve seen move that fast is a virus."

"You can’t stop progress," said Marak Squires, a coder and entrepreneur who said his "only regret in life" is not buying more Bitcoins when they were cheap. Squires compared Bitcoin to Cody Wilson and Defense Distributed’s 3D-printed gun: once the designs were uploaded to the internet, the government had no chance of erasing them.

Gavin Andresen, lead developer on the Bitcoin project.

Peter Vessenes, executive director of the Bitcoin Foundation, buying Bitcoins with cash at a prototype Lamassu Ventures Bitcoin ATM.

"Bitcoin is extra-legal," the trader said. "It only dies if you turn off the internet."

Not everyone agreed. "Bitcoin is already dead. You’re congregating amongst zombies," said Jack Alderson, an entrepreneur who did very well in Bitcoin but admitted he is now involved in some lawsuits because of it. "Have you heard of Ripple?" he asked.

Ripple is one of the many virtual currency systems that arose after Bitcoin’s ascent. There are also umpteen Bitcoin forks, copies of the Bitcoin code with some variations, including Litecoin, Namecoin, and TerraCoin. There are also add-ons such as Zerocoin, which is designed to make Bitcoin more anonymous. None of these have gained significant traction, but new ones seem to pop up all the time.

"What is the definition of the death of Bitcoin?" said Mike Caldwell, the creator of Casascius Coins. "Bitcoin is two things. It’s a community, and it’s a technology. The only way for Bitcoin to die is for people to lose interest in using it. No matter what the attacks are, there’s always going to be a way around them. Because Bitcoin is just today’s embodiment of the idea that we now have the technology to democratize money. So long as there is a demand for that, the only way I see Bitcoin dying is for it to be a predecessor to something else that does a better job."

Progress?

That doesn’t mean Bitcoin is in the clear. The e-currency has never been subject to a full-on assault from regulators, and the precedent for virtual currencies that run afoul of the US government is not good.

There’s also a disturbing cultishness to the Bitcoin community, where everyone is as bullish as can be. "Someone is going to get rich this year," Peter Vessenes, the executive director of Bitcoin, said in his opening keynote. The Bitcoin documentary that was teased at the conference is called The Rise and Rise of Bitcoin. Everyone was talking about how the price was only going up. Bitcoiner Tuur Demeester, the author of a financial newsletter, gave a talk in which he projected a number of scenarios in which the price of a Bitcoin could exceed $1,000, such as hedge funds committing 1 percent of their portfolios. "That's why I think the risk-reward ratio is extraordinary," he said. "Everyone should own at least a few Bitcoins." He did not discuss any scenarios which might cause the price to fall.

The Bitcoin community is also overwhelmingly male, an imbalance that imparts a sense of instability and mirrors the makeup of the financial industry that precipitated the 2008 financial crisis. The issue of gender came up repeatedly as the crisis was unpacked. Researchers noted that men lack risk aversion and tend to favor "fast, short-term abstractions," suggesting the crisis might have been a symptom of too much testosterone.

Still, Bitcoin has attracted benevolent stewards like Gavin Andresen, the meticulous programmer, level-headed speaker, and all-around nice guy who now leads development on the core Bitcoin protocol full time. Responsibility for the Bitcoin project fell to Andresen in April 2011 when Satoshi Nakamoto announced it was time to move on to other things, disappeared from the forums, and stopped responding to emails.

"Bitcoin had always been three steps forward, two steps back since I’ve been involved," Andresen said in his "State of the Union" talk at Bitcoin 2013. He put up a slide of a woman in a roller coaster, representing the "chaos and drama" endemic to Bitcoin.

"I happen to enjoy roller coasters," he said. "It will be interesting to see how many people enjoy roller coasters, and what happens when the roller coaster ride stops."